Key events
World share index hits record on US rate cut hopes
World shares have risen to record levels while the dollar fell amid hopes of an interest rate cut in the US in September.
The MSCI all country world index climbed for a second day, rising as high as 950.13, an all-time high. Japan’s Nikkei hit an all-time closing high for the second day in a row. Last night, the S&P 500 and the Nasdaq reached fresh peaks on Wall Street.
European stocks, on the Stoxx 600 Europe index, rose by 0.4%, with Germany’s Dax 0.7% ahead. Technology and defence stocks such as BAE Systems are among the biggest gainers. The FTSE 100 index has edged 0.1% higher to 9,157.
The dollar has lost 0.4% against a basket of other major currencies.
US treasury secretary Scott Bessent increased the pressure on the Federal Reserve, America’s central bank, calling for a half-point rate cut at its next meeting on 16-17 September.
Joshua Mahony, an analyst at Scope Markets, said
Yesterday’s US inflation report provided a somewhat perverse situation where markets become increasingly confident in Fed easing despite a five-month high for the core consumer price index metric (3.1%). It is unlikely that we will see that core CPI figure get anywhere near the 2% Fed target this year, but markets are confident that the Fed will overlook the data to slash rates in the months to come.
Market pricing for a rate cut at each of the remaining three meetings of 2025 have tipped above the 50% mark, meaning that it is now the base case scenario that we see rates at least 75bp lower by year-end. No wonder markets are in buoyant mood, with a goldilocks scenario developing where the Fed will cut rates based on poor jobs data that could be lagging in nature given the trade uncertainty that has largely been clarified.
Donald Trump continues to wreak havoc on the status quo, with the president threatening to sue Jerome Powell as he pressures the chair to cut rates immediately. The ability to sue Powell remains questionable, but the fact is that the jobs report has at least provided the FOMC with a justification of drastic action should they need it. That could include a 50bp cut, or a cut prior to the September meeting.
Meanwhile, Trump’s new Bureau of Labor Statistics chief has suggested shifting the monthly jobs report to a quarterly format in a bid to end the kind of huge data revisions seen of late. Nonetheless, this appears to be a case of Trump simply hiding the data that he does not like, providing the president with the ability to simply talk up the economy without the pesky facts. With the Fed having to take policy decisions based on the data, would the decision to remove one of the most important economic surveys mean that Fed decision-making becomes even more lagging in nature?
AI can make Rolls-Royce UK’s biggest firm, CEO says
Rolls-Royce’s efforts to power artificial intelligence (AI) datacentres with its nuclear reactors could turn it into the UK’s most valuable company, according to its boss.
The engineering firm recently reported a 50% rise in half-year profits of £1.7bn as strong demand for its jet engines and power generators for AI data centres underpinned its turnaround efforts. This drove its share price to a record high of £11.085, taking the company’s market value above £90bn for the first time. In October 2020, the first year of the Covid-19 pandemic, its share price fell below 40p.
Its power systems business had a significant increase in interest from datacentres, which the chief executive, Tufan Erginbilgiç, confirmed was linked to the AI boom. Orders for datacentres rose by 85% compared with last year. The company expects a 20% increase in datacentre orders every year to 2030.
Rolls-Royce has signed deals to supply small modular reactors (SMRs) to the UK and Czech governments to power AI-driven data centres. Use of AI has shot up in recent years across many sectors, but the technology uses a of energy.
This morning, Rolls-Royce chief executive Erginbilgiç told the BBC it has the “potential” to become the UK’s biggest company on the back of its SMR deals, overtaking Shell and AstraZeneca. He said:
There is no private company in the world with the nuclear capability we have. If we are not market leader globally, we did something wrong.
Since he took the helm in January 2023, Rolls-Royce’s share price has increased ten-fold. Today, the shares rose by almost 1% to £11.01, valuing the firm at almost £93bn. Shell is worth £155.7bn while AstraZeneca’s market value is £175bn.
He has ruled out the idea of a New York share listing, as British chip designer Arm has done. Shell and AstraZeneca have also considered it in the pursuit of higher valuations.
Half of Rolls-Royce’s shareholders and customers are US-based.
It’s not in our plan. I don’t agree with the idea you can only perform in the US. That’s not true and hopefully we have demonstrated that.
Prof Costas Miles, of the University of Liverpool’s Management School, points out that the US Federal Reserve does not target consumer price index inflation, which held steady at 2.7% in July, but inflation as measured by the personal consumption expenditures index (PCE).
The next relevant PCE reading comes out of 29 August. The two measures are heavily correlated.
His own estimates (based on the co-movements of the two inflation measures) suggest that PCE inflation is likely to drop to 2.3% in July (from 2.6% in June).
Then, the Fed might have difficulty rejecting a call for a cut by 50 basis points in the Fed Funds rate!
Evergrande shares to be delisted, marking end of era
The troubled Chinese property developer Evergrande said its Hong Kong shares will be delisted, marking the end of an era for the once biggest Chinese developer whose demise is now synonymous with the country’s property bust.
The Guangzhou-based company said the Hong Kong stock exchange has decided to cancel its listing, according to a filing to the bourse on Tuesday. The shares will be removed on 25 August and the company will not apply for a review of the decision.
The property crisis dragged down China’s economic growth. Evergrande’s demise began with its first default on a dollar bond in December 2021. It was once the country’s largest developer by sales, worth more than $50bn at its peak in 2017.
Since then, it has become the world’s most indebted property developer, with more than $300bn in debts. It is one of dozens of Chinese companies that have collapsed since 2020 under official pressure to rein in excessive borrowing that the ruling Communist party views as a threat to the economy.
In a separate filing, court-appointed liquidators said Evergrande’s debt load is far bigger than previously estimated, and any “holistic” restructuring is out of reach.
Evergrande shares were suspended from trading in late January last when it received a liquidation order from a Hong Kong court. Shareholders have seen the value of their investments plummet in recent years.
The shares last traded at less than 20 Hong Kong cents on 29 January, 2024, giving it a market value of HK$2.15 billion ($274m). Its founder Hui Ka Yan has a 60% stake.
Kristy Hung, a Bloomberg Intelligence analyst, said before the announcement:
Whether or not there’s a delisting, Evergrande’s shareholders will likely have to prepare for near-total loss.
The developer’s liquidation and substantial claims from creditors who are ahead in the order suggests equity holders face material risk of getting nothing.
Donald Trump has also been vocal, hitting out at Goldman Sachs CEO David Solomon, saying the bank had been wrong to predict tariffs would hurt the economy and questioning whether Solomon should lead the Wall Street institution.
In a post on Truth Social, Trump said it was mostly foreign companies and governments absorbing the cost of his tariffs.
But David Solomon and Goldman Sachs refuse to give credit where credit is due. They made a bad prediction…on both the Market repercussion and the Tariffs themselves.
Trump said Solomon should maybe focus on being a DJ, a hobby Solomon abandoned some time ago, “and not bother running a major Financial Institution”.
The bank CEO is the latest corporate boss to become the target of Trump’s ire.
Introduction: US treasury secretary Scott Bessent calls for half-point interest rate cut at next Fed meeting
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Global stocks rallied and US markets hit new all-time peaks after US inflation defied expectations of an uptick and stayed steady last month. The figure eased concerns that Donald Trump’s tariff hikes would push up imported goods inflation.
US treasury secretary Scott Bessent is now calling for a half-point interest rate cut in September.
The inflation data was a mixed bag – headline inflation held at 2.7% but core inflation, which strips out energy and food, was higher than expected at 3.1%. Even so, investors’ bets on a rate cut in September increased, as goods prices were more subdued while services inflation picked up.
Bessent said in an interview on Fox Business yesterday:
The real thing now to think about is should we get a 50 basis-point rate cut in September.
He said that two days after the US Federal Reserve left rates unchanged on 30 July, revised data showed weaker job growth for May and June than official figures had previously indicated, suggesting the Fed “could have been cutting in June, July”.
“Cut that rate!” summed up Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
Yesterday, US inflation data was mixed, but the market reaction was not. Normally, core inflation is the measure the Federal Reserve (Fed) focuses on when deciding monetary policy. In that context, the market could have reacted by scaling back expectations of a September rate cut.
But no — investors instead increased September cut expectations, thinking that imported goods inflation remained lower than feared as companies continued to absorb tariff costs. As a result, the US 2-year yield fell after the data release, the probability of a September cut jumped to 94% from 80% beforehand, and the US dollar slipped back.
The dollar has slipped a further 0.1% against a basket of other major currencies.
Investors cheered the news, driving the S&P 500 and the tech-heavy Nasdaq to new all-time highs, up 1.1% and 1.4% respectively. Japan’s Nikkei also closed at fresh record high, 1.3% higher on the day, while Hong Kong’s Hang Seng jumped by 2.4%.
Inflation in Germany eased to 1.8% in July from 2% in June, the federal statistics office confirmed this morning.
The yield on 30-year German government bonds are down today, after hitting a 14-year high yesterday. Analysts pointed to Dutch pension reforms, which are expected to reduce demand for long-dated bonds, and expectations for a big increase in German government spending as the main reasons behind Tuesday’s sell-off.
Markets are turning their attention to the summit in Alaska between Trump and Vladimir Putin on Friday to discuss ending Russia’s war in Ukraine.
The Agenda
9am BST: IEA Oil market report
